Finance Committee on April 30th, 2015

[The Chair, Conservative, James Rajotte]

I call to order meeting number 78 of the Standing Committee on Finance. According to our orders of the day, pursuant to Standing Order 108(2), we are continuing our study of terrorist financing in Canada and abroad.

Colleagues, we have two panels this morning. The first panel is from 8:45 to 10:15. With us here at the session in Ottawa we have presenting as an individual, Mr. Edwin Black, author and historian. Representing the Canadian Bankers Association is Mr. Ron King, senior vice-president of corporate and Canadian banking compliance. From TD Bank Financial Group we have Mr. Michael Donovan, vice-president and deputy global anti-money laundering officer. From the Canadian Bar Association we have Mr. Samuel Schwisberg, executive member for charities and not-for-profit law. From Carters Professional Corporation, we have the managing partner, Mr. Terrance Carter.

Welcome to the committee, everyone. Thank you all for being with us. You'll each have five minutes maximum for an opening statement and then we'll have questions from members. We'll start with Mr. Black.

[Edwin Black, Author and Historian, As an Individual]

Good morning to the committee. Thank you very much for inviting me. My time is short, so I'll be quite direct.

I've been asked what are some of the more important routes of terrorist financing in North America, Canada, and abroad. The documentation shows that the most entrenched, organized, and institutional financier of terrorism both worldwide and in Israel is the Palestinian Authority. When I say the Palestinian Authority, I mean all the way up to its president, Mahmoud Abbas. I have in my possession just a fraction of the 4,000 documents recently unsealed by a court in Brooklyn which delivered a $680 million judgment against the PA.

Here's how it works.

When an ordinary citizen commits an act of terrorism in Israel, that person immediately goes on salary and that salary increases by the number of lives he takes and the amount of devastation he causes. It's specifically outlined in a graduated scale in a published law called the law of the prisoner. This money can be just $500 a month for say a five-year sentence and it could be $2,000 a month if you've killed enough people to get a 30-year sentence. None of these prisoners actually believe they're going to serve their entire period of incarceration; they think they'll be released.

This money is funnelled through the Ministry of Prisoners. The Ministry of Prisoners pays out about $3 million to $7 million a month. It's issued through a POA—the POA is a power of attorney—and that money is redirected to the prisoner's girlfriend, his mother, his club, his soccer team, whatever he likes. This and other similar programs total approximately 16% of the Palestinian Authority budget. There is an analogous organization that most people have never heard of called the Martyrdom Establishment. The Martyrdom Establishment has paid out hundreds of millions of dollars for terrorist activities around the world, especially where the person becomes martyred, that is, killed or wounded. These names are enshrined on the Martyr's Roster. These details are studied all the way up to the president and these are reviews that go on for years.

I have a case here of Ahmed Barghouti, who was involved with killing at least a dozen people. We can see that his rank in the government went up each and every year. I can provide these to the committee if you wish. His rank went from corporal to sergeant to warrant officer. His salary went up each and every year. His family got benefits each and every year. The documentation shows that this was specifically reviewed and authorized under rigorous conditions by the president himself. The organizations in the government that are contributing to this are not only the Ministry of Prisoners but the police, the sports, and everything else. Even when there's an economic shortfall, this money will be prioritized above all other welfare and health activities.

That's it.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Black.

We'll go to Mr. King, please, for your presentation.

[Ron King, Senior Vice-President, Head, Corporate and Canadian Banking Compliance, Canadian Bankers Association]

Thank you, Mr. Chair.

I would like to thank the committee for inviting the Canadian Bankers Association to appear today to contribute to its study on terrorist financing in Canada and abroad. The CBA works on behalf of 60 domestic banks, foreign bank subsidiaries, and foreign bank branches operating in Canada, and their 280,000 employees.

I am chair of the Canadian Bankers Association's anti-money laundering and terrorist financing specialists group. Our industry recognizes its key role in combatting money laundering and terrorist financing, while protecting the privacy of law-abiding customers. Banks in Canada have a long history of working in co-operation with the federal government, law enforcement, and intelligence agencies, and the Financial Transactions and Reports Analysis Centre of Canada to develop and implement an effective anti-terrorism financing and anti-money laundering regime. ln addition to the hundreds of millions of dollars that the banking industry spends each year to defend against money laundering and terrorist financing, all the CBA's member banks have policies and procedures in place covering AML/ATF, including key elements such as "know your customer" rules and the reporting to FINTRAC and the Canada Revenue Agency of prescribed transactions. These policies and procedures are designed to help protect Canadians as well as the safety, soundness, and reputation of the Canadian financial system.

We would like to propose some recommendations for the committee to consider that we believe would significantly enhance the ability of banks in Canada to detect and prevent terrorist financing and other criminal activity.

We believe it is important to highlight the distinction between money laundering and terrorist financing. Money laundering involves converting the profits of criminal activity into a seemingly legitimate asset, whereas, on the other hand, terrorist financing is about the intent to use funds for terrorism-related purposes. For terrorists, the origin of the funds, whether legitimate or criminal, is entirely irrelevant. Terrorist financing often occurs in small amounts and the use of those funds can seem entirely ordinary, including things like normal travel and living expenses.

The current AML/ATF regime includes provisions to address the prescribed one-way sharing of information with government and law enforcement. However, there are no specific provisions to allow the sharing of information among Canadian financial institutions or between FINTRAC and reporting entities. We believe that the government should consider allowing enhanced disclosure and information sharing in these areas. Current privacy legislation, with the exception of the investigative bodies regime under PIPEDA restricts the disclosure of personal information without the knowledge or consent of the client. This makes it challenging to restrict a customer who presents a higher risk for terrorist financing. For example, if a financial institution terminates its relationship with a customer for their suspected involvement in terrorist financing, there is virtually nothing that prevents that client from obtaining the same services from another financial institution. By allowing greater information sharing among financial institutions, the AML/ATF regime as a whole would be strengthened.

Furthermore, we believe that Canada's AML/ATF legislation would be enhanced if FINTRAC were allowed to disclose information to banks and other reporting entities. FINTRAC could then request additional information from financial institutions about a specific report and provide feedback on the reports submitted to reporting entities. This would assist reporting entities, such as banks, to more effectively implement a risk-based approach to identifying higher risk customers. This issue was raised in the Senate banking committee's 2013 report on the AML/ATF regime.

There is significant benefit to be gained by having all partners in the regime work more closely together—banks and other regulated entities, policy-makers, regulatory agencies, and law enforcement. If given the opportunity and agility to act quickly, banks can provide greater assistance to the overall effort to combat money laundering and terrorist financing.

ln this regard, we are recommending that the current regime be strengthened to enable an information exchange among financial institutions, FINTRAC, and law enforcement regarding persons of interest, including real-time feedback on terrorist financing activities. This would enable Canadian banks to better detect complex money laundering and terrorist financing schemes.

As part of the effort to ensure that Canada has a consistent regulatory framework applying to all entities that may be vulnerable to money laundering and terrorist financing, we believe that payments services providers and new technology that are currently unregulated should be captured by the current regime. Leaving gaps in the regime only shifts the risk to someone who is likely to be less able to prevent, detect, and report on suspicious transactions.

In closing we would like to reiterate the strong support of the banking industry for the AML and ATF regimes. Banks take very seriously their role in preventing the financing of terrorism, while balancing the need to protect the privacy of Canadian citizens.

We are pleased to have an opportunity to work cooperatively with the government and parliamentarians to ensure that Canada's AML and ATF systems are thorough and effective.

Thank you once again for providing the CBA with this opportunity to offer our views.

[The Chair, Conservative, James Rajotte]

Thank you very much.

We'll go to TD Bank, next, please.

[Michael Donovan, Vice-President, Deputy Global Anti-Money Laundering Officer, TD Bank Financial Group]

Thank you.

Good morning, Mr. Chair, and members of the committee. Thank you for the opportunity to appear before you here today on this very important topic.

For the past four years I have been the deputy global AML officer for the TD Bank Group. Prior to joining TD, I worked at FINTRAC for approximately 10 years.

I concur with the points made by my colleague, Ron King, in particular with the need for policy change that would allow for greater information sharing among Canadian financial institutions, as well as between FINTRAC and reporting entities.

TD is committed to our responsibility to detect and deter money laundering and terrorist financing, and we believe that allowing for more information sharing between Canadian financial institutions would make Canada's financial system more effective by building a more comprehensive picture of a customer's activities when potential money laundering or terrorist financing is suspected. Our experience has been that other jurisdictions have considered this same issue and have created AML regimes that allow for information sharing amongst financial institutions, all the while still respecting an individual's privacy rights.

In addition we were pleased to see the economic action plan 2015 announce better access to basic banking services by allowing a broader range of personal identification to open an account. TD supports a policy framework that provides for the expanded use of customer identification techniques for both face-to-face and non-face-to-face transactions.

From an AML regime perspective, financial institutions' use of existing and emerging technologies provides them with new techniques to identify their customers, particularly those operating in an online environment. The use of pass codes, out-of-wallet-type questions, credit bureau checks, and even markers from the computing devices being used all provide valuable information when identifying a customer. They can significantly enhance customer due diligence practices, gathering numerous pieces of information in a safe and secure manner for use in customer identification. This can also assist in identifying suspicious transactions that might be related to money laundering or terrorist financing.

These policy changes would not lighten the regulatory burden or weaken the regulatory environment. They would actually enable regulators—in this case, FINTRAC and OSFI—to review and judge the practices of individual institutions and make risk-based decisions about the anti-money laundering and anti-terrorist financing program of each institution.

We look forward to seeing the details of these specific government proposals in the coming days and weeks.

In conclusion, TD believes that these changes, combined with greater information sharing among financial institutions, will significantly strengthen the Canadian regulatory regime to prevent money laundering and terrorist financing.

I look forward to today's discussion and I am pleased to answer any questions that committee members may have. Thank you.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation.

We'll now hear from the Canadian Bar Association, please.

[Samuel Schwisberg, Executive Member, Charities and Not-for-Profit Law, Canadian Bar Association]

Thank you very much.

I'm here on behalf of the Canadian Bar Association's charities and not-for-profit section. The CBA, as I think you all know, is a professional association of some 36,000 lawyers, notaries, law teachers, and law students, and the charities and not-for-profit section is composed of Canadian lawyers who advise charities and who sit on their boards.

In my personal capacity, I'm also general counsel and corporate secretary of the Canadian Red Cross Society. I am here today not in that capacity but rather as a representative of the Canadian Bar Association.

Now, I'll be taking a somewhat “unlawyerly” approach to my little chat with you today by talking about the big picture and not very much about the details. The theme I want to share with you today is that charities are actually an asset in countering terrorism. While the vulnerability of charities to abuse by potential terrorists has been noted quite often, I think it's important to make the point that charities are in fact an asset in countering terrorism. This is not something you need to take from me or from the Canadian Bar Association, but you might merely consult the guidance of the financial action task force of 2013 regarding its best practices for combatting abuse for not-for-profit organizations.

In that guidance, the organization says that “NPOs can also play an important role in preventing the causes of radical ideology from taking root and are, therefore, potential allies in the fight against terrorism”. Moreover, if you couple that with the fact that one of the four pillars of Canada's counterterrorism strategy is prevention, it's important to note that charities can play an important role in the prevention element of the strategy as well, given their outreach to communities both within Canada and outside Canada.

Now, when you consider that charities in this context are an asset, it's instructive to also consider the kinds of regulatory compliance costs they face when they're in fact trying to comply with the laws of Canada. That, of course, needs to be done, but the costs are significant. Sophisticated financial systems, volunteer and donor screening, and legal and financial advice must be paid for. There are procurement policies, gift acceptance policies, audit rights, and sophisticated contracts for the control of funds disbursed to others. There is project planning and sophisticated governance for boards of directors, including good governance, bylaws, policies, and training.

All these things cost charities a great deal of money, and when you consider that in Canada and elsewhere the public expectation is that most donated dollars must go to the beneficiary and that administrative costs must be kept low, you can see the bit of a bind that charities find themselves in. Moreover, donated dollars are possibly only one source of revenue, but investment policies must be very conservative. That's the law. As a charity, you can't take risks with charitable assets, and you can't really go into business, because the Canada Revenue Agency requires your business to be subordinate to your charitable objects.

So where do charities find the funds to comply with these important compliance requirements?

The Canadian Bar Association's written submission has a number of suggestions for the committee to consider, one of them being Canada Revenue Agency education on a pre-audit basis before ill-equipped charities get into trouble so that they know what they're getting into in terms of compliance costs. The Canadian Bar Association also suggests possible cost recovery and allocation of funds to charities for the specific purpose of achieving greater compliance.

These are some of the suggestions the Canadian Bar Association is sharing with this committee today to try to find creative solutions to assist charities in complying with legal requirements in Canada.

That is essentially my presentation, and I thank you very much for your time, as does the Canadian Bar Association.

[The Chair, Conservative, James Rajotte]

Thanks very much for your presentation to the committee.

We'll now hear from Mr. Carter, please.

[Terrance Carter, Managing Partner, Carters Professional Corporation]

Good morning, Mr. Chair and members of the committee.

It's my privilege to be asked to be here today as a witness dealing with the matter of terrorist financing. My focus will be on the matter of best practice measures for charities and non-profit organizations.

As background, I'm managing partner with a law firm that works with charities and not-for-profits across Canada and internationally, and we have acted for thousands of charities with regard to their operations, including operations outside of Canada and in conflict areas. In the course of advising charities, we've had to advise boards of directors and senior management on the appropriate due diligence that the organizations need to carry out in order to be compliant with Canada’s anti-terrorism legislation.

What we've observed over the last 15 years in working with charities is that, without exception, they all want to be compliant with Canada's anti-terrorism legislation, but many find it challenging to do so. From a practical standpoint in this regard, many charities either take the position that the obligation associated with complying is not material to their charitable operations or, if it is, their efforts to comply may not be as robust as they could be due to perceived or real limitations in their operating budgets or overall resources. A limited number of charities have instituted comprehensive due diligence policies and procedures, but they are generally the exception to the rule.

The inability of most charities operating in the international arena to become appropriately engaged in the due diligence required to be compliant with Canada's anti-terrorism legislation is due to a great extent to the anti-terrorism legislation itself and to a general lack of guidance and direction from the Canadian government on how charities can best comply with the legislation.

First, when Canada's anti-terrorism legislation is explained to senior management and/or members of the boards of directors of charities operating outside of Canada, they find the legislation to be overly broad, confusing, and difficult if not impossible to comply with on a practical basis.

As an example, under subsection 83.19(1) of the Criminal Code, it's an offence to “knowingly” facilitate a terrorist activity. However, the mens rea element of the offence—i.e., knowingly—is rendered virtually meaningless by the paragraphs under subsection 83.19(2) in stating that a terrorist activity is in fact:

...facilitated whether or not

(a) the facilitator knows that a particular terrorist activity is facilitated; (b) any particular terrorist activity was foreseen or planned at the time it was facilitated; (c) any terrorist activity was actually carried out.

Such overly broad provisions subject historically legitimate means of providing humanitarian aid in conflict areas to criminal sanctions, something that the boards and senior management of Canadian charities operating abroad are understandably very worried about.

Second, charities operating in the international arena generally find a lack of clear rules or guidance from the Canadian government to assist them in knowing exactly what it is that they should do or not do in order to be compliant with Canada's anti-terrorism legislation. In this regard the brief checklist, such as the 2009 CRA charity directorate checklist for charities in avoiding terrorist abuse, which has only passing reference to international guidelines, does not provide sufficient information for domestic charities to be properly informed to adequately conduct the necessary due diligence investigations required for practical compliance purposes.

References to international guidelines, such as the FATF or the U.S. treasury guidelines, should only be used to enhance clearly written due diligence guidelines that Canadian charities need to follow and should not instead result in a moving target for compliance, as is currently the case.

In response to the challenges, I would like to make the following recommendations. First, with regard to the legislation itself, amend the appropriate provisions of the Criminal Code to eliminate the strict liability element of facilitation offence, and require the Crown to prove criminal intent to find any person guilty of such an offence.

Second, consistent with what the Canadian Bar Association and others have mentioned, I would suggest that made-in-Canada guidelines should be adopted that would allow charities that wish to be compliant to have clear parameters with what they need to do and what they should not do in order to comply with Canada's anti-terrorism legislation and be able to evaluate their performance. In this regard, the Canada Revenue Agency should be encouraged to work in collaboration with the charitable sector in the development of these guidelines.

It's been my pleasure to provide input to the Standing Committee on Finance, and I look forward to the opportunity of providing further comments.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation, Mr. Carter.

Colleagues, we'll do six-minute rounds, and we'll start with Mr. Cullen, please.

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

Thank you, Chair.

Let's start with charities. Mr. Schwisberg or Mr. Carter, do we know how many of the 170,000 charities in Canada have actually been listed by the government as providing funds to terrorist activities?

[Terrance Carter]

Just to clarify, there are not 170,000—

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

There are 85,000 registered, and 170,000 non-profits and others.

[Terrance Carter]

—85,000, but there are non-profits.

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

Let's take either of those numbers, either the 85,000 or the 170,000 non-profit, do we know how many have been listed by the government as providing funds to terrorist activities?

[Terrance Carter]

I know of only one.

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

Broadly speaking, the charitable sector in Canada is one we are all broadly encouraging. I look around this table, and all of us have appeared at events and donated money. I look at the recent tragedies in Nepal. Many of us and our constituents give generously.

Here is the conundrum I have with the way the law is described, particularly as you have outlined it, Mr. Carter. I donate to the Red Cross, Oxfam, or Feed the Children, and they go in to help provide aid in Kandahar to children going to school. The one section of the act that you outlined, in terms of the culpability of the board of the Red Cross, Oxfam, or any of these charitable organizations, seems to put a lot of liability on the board for being able to determine if any of that aid ever ended up in the hands of someone who later committed a terrorist activity. In places, particularly in international development and international aid, this is challenging.

How do we square this? The intention is right. We don't want Canadian funds passing through legitimate charities and then ending up in the hands of people looking to do harm there, or to us. How do you assign culpability to a board of directors in Canada—for example, Save the Children, which provides $100,000 worth of food aid and school books—if some of that food or materials end up in the hands of a terrorist entity?

[Terrance Carter]

Sir, what you have just described is exactly the response I get from members of charities' boards of directors when I explain what the law is, and particularly the section dealing with facilitation, which says “directly or indirectly facilitate”.

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

There is also “knowingly or unknowingly”.

[Terrance Carter]

Exactly.

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

Again, with good intention in the law to prevent Canadian funds from landing in the hands of terrorist organizations, how can someone be held criminally liable for unknowingly passing aid through reliable and good organizations? If, in confusing places like Syria, some of that aid ends up in the wrong place six months later, four hands down the line, the board of directors back here in Toronto, Halifax, or Vancouver is held criminally liable. Is that the way the law is designed right now?

[Terrance Carter]

That is the way the law is written. It exceeds the recommendations and the international standards of FATF and other UN bodies. We have much more onerous legislation in Canada than anywhere else in the world.

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

The law of unintended consequences is important in trying to understand how to limit terrorist activities here.

The ones that come to mind are some of the larger organizations. I am thinking about some of the smaller ones, some of the Christian charities that work out of my riding, with two or three staff and 20 or 30 volunteers. They hold a fundraiser. They are trying to get food or aid into Iraq. For that board of directors, who are all volunteers, is there any assistance provided by CRA to comply with the law as it is written right now? I mean financial assistance to do the proper accounting.

Mr. Schwisberg, do you have any experience in this? You talked about upfronts and meeting with the charities early on, to comply.

[Samuel Schwisberg]

Yes. Sometimes contracts with DFATD can provide some funding for compliance costs, but you have to ask for it and you have to know about it. Certainly some education is required.

Even for a larger organization, the way the law is constructed now.... Picture me at a board of directors. They ask me, “Are we compliant with all the laws of Canada?” Can I state that with any great confidence, given the way the law is stated? It is quite possible that some would-be terrorist, three years down the road, after getting treatment at an emergency response unit, a MASH we've set up there, goes and commits an act of terrorism.

If you look at the pure writing of the law, the literal meaning of the law, we could be held liable for that. There is a lot of reliance on prosecutorial discretion, which we don't feel is consistent with the rule of law. In our submission, there needs to be more clarity in the law so that charities have a clear understanding of what they can and cannot do.